What is a junk bond?

Junk bonds are also called high-yield bonds since the higher yield is needed to help offset any risk of default. A junk bond is debt that has been given a low credit rating by a ratings agency, below investment grade. As a result, these bonds are riskier since chances that the issuer will default or experience a credit event are higher.

What does a junk bond rating mean?

The junk bond rating means that there is a greater risk that the issuer will default on the debt, relative to investment-grade bonds. As a result of this increased risk, junk bonds offer a higher interest rate than investment-grade bonds, all else equal. The quality of junk bonds can vary markedly.

Why are junk bonds a good investment?

Junk bonds are also known as high-yield bonds because the interest payments are higher than for the average corporate bond. Companies that issue junk bonds pay high interest rates to entice investors to take on the greater risk of lending them money. An investment-grade credit rating denotes little risk that a company will default on its debt.